Germany’s Bonds Decline Amid Signs of U.S. Short-Term Debt Talks

Germany’s 10-year (USGG10YR) government bonds fell for a third day along with Treasuries as U.S. lawmakers indicated they’re open to a short-term increase in the debt ceiling, damping demand for the safest assets.

The German 10-year yield climbed to the highest level in two weeks. Austrian, Belgian, Dutch and French securities also declined. Italy sold 8.5 billion euros ($11.5 billion) of 365-day bills today, before an auction of as much as 6 billion euros of bonds due between 2016 and 2028 tomorrow. Minutes from the latest Federal Reserve meeting released yesterday showed most policy makers said the central bank was likely to reduce the pace of its bond purchases this year.

“Bunds and Treasuries are down on signs that there might be some movement in the debt ceiling deadlock,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “We are not convinced by this move as the U.S. situation is not solved. Even with a solution, the U.S. data in the next few weeks will not be so good and there might be uncertainties on whether the Fed will taper in December.”

Germany’s 10-year bund yield increased six basis points, or 0.06 percentage point, to 1.87 percent at 4:24 p.m. London time after reaching 1.88 percent, the highest since Sept. 24. The 2 percent security due in August 2023 fell 0.505, or 5.05 euros per 1,000-euro face amount, to 101.17.

Debt Ceiling

House Republican and Senate Democratic leaders in the U.S. are open to a short-term increase in the $16.7 trillion debt ceiling, according to congressional aides who spoke on condition of anonymity. Economists say a failure by the world’s largest borrower to repay its debt will devastate stock markets and throw the U.S. and world economies into recession.

The U.S. government enters its 10th day of a partial shutdown before its borrowing authority lapses Oct. 17.

Benchmark Treasury 10-year note yields rose five basis points to 2.71 percent, after reaching 2.72 percent, the highest since Sept. 23.

Italian bonds advanced as investors sought higher-yielding securities.

HSBC Holdings Plc has added to its dollar-hedged positions in Spanish and Italian bonds, Fredrik Nerbrand, HSBC’s London-based global head of asset allocation, wrote today in an e-mailed report.

“There are several reasons that an investment in Europe currently appears attractive,” Nerbrand wrote. “The eurozone is out of recession and the economic outlook has improved. At the same time, in recent weeks several potentially testing political obstacles have been successfully navigated, which should reduce uncertainty.”

Yields Fall

Italian 10-year yields fell five basis points to 4.33 percent, while the rate on similar-maturity Spanish debt was little changed at 4.34 percent.

Italy sold one-year bills at an average yield of 0.999 percent, compared with a rate of 1.34 percent at a previous auction on Sept. 11.

The Rome-based Treasury last sold three-year notes on Sept. 12 at 2.72 percent, compared with 2.33 percent at a previous auction on July 11. It allotted 15-year bonds last month at 4.88 percent, up from 4.67 percent at a prior sale on June 13.

Volatility on German bonds was the highest in euro-area markets today, followed by those of France and Austria, according to measures of 10-year debt, the yield spread between two- and 10-year securities, and credit-default swaps.

The yield on Austria’s 10-year bond increased five basis points to 2.25 percent. French 10-year yields climbed four basis points to 2.39 percent, while the rate on similar-maturity Belgian bonds rose four basis points to 2.62 percent. The yield on Dutch 10-year securities added five basis points to 2.24 percent.

German bonds lost 1.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. Spanish securities returned 9.2 percent and Italy’s gained 4.8 percent.

To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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